Our Flag Restored to the Oceans

By MarEx 2013-12-23 09:41:00

Pictured: Authors (L) Gerald Malia (R) Murray Bloom

The United States is dependent on foreign-flag ships and foreign crews for almost all of our international trade.  Our statutory policy is to have a strong Merchant Marine—comprising suitable ships capable of carrying a substantial portion of our foreign trade and supplemented by efficient facilities for building and repairing ships—but we do not have such a Merchant Marine.  There are long-standing programs that have been authorized by Congress to finance and subsidize the construction of vessels in U.S. shipyards, and to support the operation in foreign trade of U.S.-flag vessels.  However, over the past forty years, the appropriations for maritime support programs have been meager and inadequate for the stated goals.

In some ways, it may be a daunting time for U.S.-flag vessels to compete in international trade.  Container shipping is overtonnaged and ships are laid up, slowed-down, and orders for new ships held up and at the same time cargo movements have “matured.”  Long gone are the days when containership pioneer Malcom McLean would “find” cargo. 

But, on the other hand, this may be the time to enter this market which is surely here to stay at some level.  Many containerships are laid up and can be acquired at reasonable cost.  More can be built in the U.S. with the latest features, including using liquid natural gas (LNG) as fuel.  In fact, due to the abundance and low cost of LNG in the U.S., domestic shipyards are already leading the way to convert ships from fuel oil to LNG.

An initial project to reestablish America’s place in international trade could include a fleet of:

15 containerships (10 acquired/5 new buildings)

5 LNG new buildings

10 barges

If implemented, this project could result in new jobs that may be estimated to be upwards of 8,000 to 10,000 at sea, ashore, and in shipyards and cargo terminals.  Containerships would be made available to Atlantic and Pacific intercontinental services and barges made available for feeder services as appropriate.  Additional ships would be available for negotiation of long-term contracts for moving military support cargo to Europe, Japan and Korea,

The cost of this project will depend on the number of ships acquired/constructed and will be an order of magnitude of $1,000,000,000 or more.  How can this project be funded, particularly without expenditure of public funds? Simple.

There is a huge amount of U.S. funds held offshore because of our tax laws, which allow foreign profits of domestic companies to remain untaxed so long as the profits are held and reinvested offshore.  Use of a tax deferment program already provided by the Congress for the maritime industry would only need a slight amendment to permit application of the tax deferral to the repatriated funds. 

At present, the Capital Construction Fund (CCF) program administered by the Department of Transportation allows a deferral of current income tax on funds deposited into a designated account.  Funds may be deposited into a CCF account only if they result from the operation, sale, loss or depreciation of designated vessels.  Withdrawals from the CCF account may only be used to acquire, build or reconstruct approved U.S.-built ships.  The tax basis of the new asset is reduced by the amount of the withdrawal, so that the owner takes less depreciation and consequently pays additional taxes over the life of the asset—unless the owner acquires or builds/rebuilds additional vessels, so that the tax deferral is continued indefinitely.     

The tax deferment principle of the CCF should be enhanced and expanded to make this program work better.  The CCF statute can be amended quite easily to allow deposit of funds from any source—not just shipping related funds.   The CCF statute can also be tweaked to improve its utility for capital formation, by allowing CCF funds to be transferred to entities ready for immediate investment in approved programs.  

If foreign profits are funneled through the CCF, instead of being parked overseas, the industrial base and military capability of this country would be greatly enhanced—as is the purpose of the CCF in the first place.  Additional CCF use would foster new U.S. ships and terminals using the latest technology and environmental features, e.g., LNG fuel.  The additional crew member jobs on these new ships would be reserved to U.S. citizens (as provided for by existing statute).  Finally, this project is called for because it would restore our flag to the oceans of the world.

This article was submitted on behalf of Gerald Malia, Esq. and Murray A. Bloom, Esq.  Gerald Malia is a long-time maritime attorney.  Murray A. Bloom retired from the Maritime Administration as Assistant Chief Counsel for Maritime Programs.  Together, we have taught Maritime Law at Columbus School of Law, Catholic University of America.  

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